FXA Column

Eur/$, upside into end of Dec still favored

Tue, Dec 18 2012, 16:50 GMT
by David Solin | FXA

Near term eur/$ outlook:

Been discussing for quite some time the view of upward "pressure" into the end of Dec, given the seasonal chart which points sharply higher into the end of the year (see 3rd chart below), and continued positive technicals (see buy mode on daily macd at bottom of chart below). Also, markets have a tendency of continuing their larger trend during Dec (higher in this case), likely due to a stepping back of numerous participants, while the remaining have a greater impact (trend following models for example). At this point, the magnitude of the near term upside remains a question (could top around here the next few weeks, or could see further gains and another 3 big figures of upside). But as also been discussing, the timing of a top (end of Dec/early Jan) is the main driver and not a specific price level in this case. Nearby resistance is seen in the 1.3235/60 area (top of bearish channel since May 2011, see longer term below), while support is seen all the way down to the 1.3125 (broken highs over the last few months).

Strategy/position:

With another few weeks of upward "pressure" still favored, prefer to be trading from the long side. However, with the magnitude of the upside a question and the market trading near longer term resistance at the ceiling of the bearish channel from May 2011, not seen as a good risk/reward in just chasing the market higher from here. So instead for now, would buy a pullback toward 1.3035/50 (lower entry, lower risk), and then stopping on a close below the month long bullish trendline (currently at 1.2955/65). Note that the market can continue to move higher directly from here, but don't forget that positioning in driven by risk/reward, which will at times mean missing some moves if an entry is not warranted.

Longer term outlook:

No change as the upward "pressure" that is favored into the end of the year is seen likely ending the whole upmove from the July low at 1.2045, and not the start of a more major, new upleg (see in red on weekly chart/2nd chart below). Note that there is no sign "pattern-wise" of a more major bottom (5 waves up), while the broader US$ index is seen bottoming over the next few weeks (before resuming the longer term upmove), with both adding to the view of an important topping in eur/$ nearing.

Strategy/position:

With upward "pressure" into the end of the year still favored, would maintain the neutral bias for now. But assuming the longer term topping scenario plays out, will be looking to switch to the bearish side early in Jan (and likely at higher levels).

Current: